Fed Expansionary Monetary Policy

Fed Policy

Economists have been puzzled by the question of whether or not the Fed should begin its exit from expansionary monetary policy, primarily due to the reason that surrounds all policy change - there are benefits, and there are costs. The expansionary monetary policy essentially focuses on expanding the economy through increasing the GDP, and this is done through increasing output and employment through the lowering of interest rates. With the economy recovering slowly but surely, many economists believe it is in fact time for the Fed to exit from its expansionary monetary policy; however, there are underlying problems that still have yet to be addressed, and diverging from this policy will bury those problems deeper. The Fed should not begin its exit from expansionary monetary policy because there are problems within the area of employment that have yet to be solved.

Though the goal of the expansionary monetary policy to reduce unemployment is being achieved, the rate of growth has been slow in response. The unemployment rate “dropped to 7 percent”, an achievement considering it was nearly 7.8% in September (Lee, Unemployment rate hits 5 year low). Contrary to expectations, the growth of the US economy has been described as bring “so meager that the economy, by some metrics, is still very sick” (Mankiw, In Fed Policy, the Exit Music May Be Hard to Hear). Recovery today has been slower due in part to the fact that the United States is a service economy, which is unlike economies in the past. In fact, “services have risen from 40 percent to 65 percent of output and from 48 percent to 70 percent of jobs” (Olney, More Services means Longer Recoveries). When there are essentially more services being produced in an economy, g...

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... the interest rates, aggregate demand will decrease. Because there is no good that is being produced and no people employed to produce that good, there will be a decrease in disposable income of the workers, and thus lowered consumption because the workers will be wary of spending. As a result, unemployment will increase and inflation will decrease because workers will be willing to work for lower wages - a situation that has occurred in our economy as well. On the contrary, when interest rates are low, the expected rate of return in likely to be higher than the interest rates and thus banks will be more likely to lend money to borrowers. Unlike the previous conditions, spending and output will increase while unemployment decreases, driving inflation higher. This is due to producers passing higher costs of production, which arise from higher wages, onto consumers.